China's SOE reforms to be key driver of nation's growth

The country has recently announced upcoming changes.

State-owned enterprise (SOE) reforms will be an important driver of growth as China aims to ratchet up corporate efficiency and returns, amid apparent upcoming changes in the nation.

According to a research report from Barclays, China appears to be getting back on its SOE (state-owned enterprise) reform agenda, having recently announced a wave of reforms targeting at improving operational and asset efficiency.

Barclays is looking for more reform initiatives at both the central and local level.

It also expects to see easier entry for private capital into the ‘strategic’ and ‘pillar’ industries, a gradual reduction in state ownership in competitive sectors, and more aligned interests between managements and corporate performance.

The report noted that there is no ‘one size fits all’ reform path, as that will depend on the nature of each SOE and their strategic importance to the state.

Here's more from Barclays:

The aim of the State-owned Assets Supervision and Administration Commission (SASAC) in the upcoming SOE reforms is two-fold: 1) separation of ownership and regulation; and 2) improving asset returns enabling better asset allocation at a national level.

The reform announcements will be initially implemented through a couple of pilot companies.

We expect the selected SOEs such as COFCO, BOCOM and the Chinese asset managers to benefit, should the reforms be executed successfully.

We recommend buying the COFCO ‘18s.

Equity Research: With supply overcapacity and operational inefficiency dominating some of China’s largest industries, SOE reforms have long been on the agenda for many Chinese companies, thus the question was a matter of timing.

With an announcement from the SASAC on 15 July 2014 providing a baseline for what is likely to be a long and nuanced road to SOE reforms, this has also spurred on companies such as Bank of China, PetroChina and Sinopec to announce their own reform plans, aimed at diversifying ownership and asset sales.

In the long run, we expect the reforms will be positive for China’s corporate development, if executed effectively; but nuances across industries and companies are likely to present risks in the near term.

We examine some of the reforms being undertaken and respective risks and opportunities these may present in the banks, telcos, basic materials, oil & gas and transport industries.